If you are a like the majority of home buyers in the US, when it comes to buying a home, you are likely going to rely on financing the purchase and therefore you’ll be working with a mortgage lender. It’s easy to feel overwhelmed at the process of choosing a lender, based on comparing bank fees and interest rates and the process of buying a home in general. With the right agent in your corner, and with the right guidance at hand, you shouldn’t be anxious about the process. These five factors are worthy of consideration when purchasing a home, to ensure you find the best rates at the lowest fees, and the right lender for your mortgage needs.
Many people think that the path to homeownership begins with looking at homes and seeing listings on the market for sale. Actually, understanding the true cost of home ownership is the first step of purchasing a home. Your mortgage payment each month will be made up of principal repayment, which pays down the overall balance due on the home and interest on the loan amount borrowed.
Property taxes, which as a rule of thumb, are valued at 1.2% of tax assessed value each and every year. Homeowner’s insurance is also required on a financed purchase as well. Prices on homeowner’s insurance range from about $700 up to $1200 depending on the home’s value, and level of coverage you choose. For planned unit developments (PUD) or condos, there may be PITI insurance requirements too. If you are in a condo, townhome, or neighborhood with a homeowner’s association, there are monthly, quarterly, or annual dues required to cover upkeep and maintenance (for condos), as well as general building or maintenance of amenities. Costs for HOA fees may range from $100 to $2,500 annually.
Know your history
Credit history plays a major role when lenders are determining interest rates. Lenders want new loan applicants who have a strong credit history, which means paying bills on time, and therefore will have a high credit score. So before you get into the frenzy of house hunting, please do yourself a favor and do your own research. Know your score before applying. If you have a strong credit history this is great; otherwise, consider chatting with a lender who does credit fixes and rapid rescores. Trust me, before applying for new credit lines or paying off monthly revolving debts “willy nilly” with no guidance or game plan, consult with a lender who can tell you, based on your credit profile, what debts paid off to which creditors will give you the fastest increase on your credit score! It’s well worth it and costs you nothing with the right lender.
How much do you want to spend and when do you want to close?
You already know your monthly income of course and most of us have at least a general idea of what our monthly expenditures are (at least the big ones), as well as a general cost of monthly purchases you make for living expenses. This should help you create a basic template of somewhat of a budget for the amount you can set aside for a mortgage payment each month off of these figures. Most loan types today require your mortgage payment on the home you are going to purchase to not be more than 21%-28% of your monthly income (including any escrows for taxes and insurance added to that payment).
To choose the right loan, you should consider how long the game plan is for this move. If you don’t plan on making any job changes and you are in for the long haul, then a 30 year mortgage probably is a best fit.
FHA and VA loans (for veterans or active service members) are great for individuals who don’t have 20% to put down on a home. Even with Fannie Mae/Freddie Mac guidelines on conventional loans, it’s possible to do a low 3-5% down loan.
Getting pre-approved is the first step to home buying. It just is. I know that it’s not the fun part. Everyone, including me, loves looking at houses. It’s exciting because home buying is life changing and you can’t find a home without seeing them! Yet without a pre-approval done first, all that effort may result in disappointment if you end up being denied by a lender or denied as to the amount you could be pre-approved for and your budget gets greatly diminished.
Recently I had a buyer who owned her own home, needed to sell, but her Mom and Dad were going to get a loan to help her buy a home without having to sell her home first. I met her, along with Mom and Dad, multiple times as well looked at houses in the school district she wanted to be in within a price range of about $250k-$275k. I kept asking her over a two week period in which we were looking at homes as to whether or not “Mom and Dad” had gotten pre-approved yet. She would send me “one more listing” to look at and pushed the proverbial can down the road as to “they’ll get to that.” Today after trying to schedule yet another showing, she sends me a text,
“Good afternoon. I hate to text while your on vacation. My parents weren’t approved for anything above 190,000. I’m going to stick with my house for now. Sorry”
This is why your agent, any good agent, will encourage you (and encourage you some more) to make sure you are pre-approved before getting too deep into the process. Why? Because we see this every day. As a real estate agent I know that if we do things in the right order, the process will go smoothly and all those ‘nightmare’ scenarios you read about won’t happen to you because there won’t be any surprises. Trust me, never met a buyer yet that was not completely sure that they’d have no troubles getting pre-approved. Yet it happens.
If you are self employed, retired and on a fixed income, or have a job you haven’t yet started yet, for example, it will take more details to get that pre-approval done. All that takes more time.
Multiple offers and why waiting will cost you
The other reason to do this first as you begin your house hunting is that we see listings right now in a low inventoried sellers’ market getting multiple offers. To even make an offer that has any credibility to a seller, you’d have to have that pre-approval done upfront. What that means, if you are not prepared, is that there may be a lot of disappointment if you spend a lot of time finding that dream home just to find out that other buyers have beaten you to the punch!